This thesis examines whether ownership concentration, board of directors, auditcommittee and ethnicity of directors affect conservative accounting. Additionally,this thesis examines whether the impact of firms’ governance on conservatism ismoderated by ownership concentration. Previous evidence has suggested thatconservative accounting controls the agency problem, but so far, there is noevidence that it is applicable in Malaysian firms, as firms are closely held by thecontrolling shareholders.

This thesis employs panel data on Malaysian listed companies observed overseven years from 2001 to 2007. Malaysian firms are chosen as the samplebecause they provide a useful setting for the study of ownership concentration andenable us to identify whether strong governance attributes in firms withcontrolling shareholders function effectively.

Conservatism is measured using two approaches: (a) an accrual-based methodfrom Givoly and Hayn (2000) and (b) asymmetric timeliness from Basu (1997).Substantial shareholders are used to proxy for ownership concentration, and areclassified into: (a) inside shareholders who are executive and non-executivedirectors, and (b) outside shareholders who are not involved with themanagement. Four characteristics of the board of directors are identified: boardcomposition, board size, board skill (proxied by board tenure, board financialexpertise and multiple directorships) and CEO duality. Three characteristics ofthe audit committee are specified: audit committee composition, financialexpertise and audit committee meeting. This thesis focuses on two ethnic groups:Malay (Bumiputera) and Chinese directors, who sit on the board of directors andthe audit committee.

The empirical results show that the existence of controlling shareholders can leadto significantly lower accrual-based conservatism, but they do not influenceasymmetric timeliness. In contrast, none of the board and audit committeeattributes appear to determine accrual-based conservatism; but board composition, board financial expertise, audit committee composition, audit committee financialexpertise and audit committee meeting are significantly associated withasymmetric timeliness. Results in this thesis surprisingly show that, independentdirectors on the audit committee are associated with lower asymmetric timelinessand this finding remains after using alternative measures. This thesis provide noevidence that board size, board skill (proxied by directors’ tenure and multipledirectorships) or CEO duality are associated with conservatism. The ethnicgroups influence conservatism but the evidence is mixed, implying that therecould be other factors that explained the directors’ behaviour than their ethnicityper se. The analysis of the moderating effect confirms that firms’ governance haspositive influence on conservatism. However, ownership concentrationnegatively moderates the relationship between firms’ governance andconservatism.

The implication from these findings is that the great power that the controllingowners exert may diminish the role of financial reports in controlling andmonitoring the management. The merits of conservatism as a governancemechanism do not seem to function appropriately when its application isdetermined by the controlling parties, who are supposed to be subject to itscontrol. Policy makers and regulatory bodies should interpret this evidence asmotivation for them to strengthen their enforcement of legal shareholderprotection.